Income insecurity is on the rise, especially among non-whites or Latinx. About a quarter of non-white or Latinx families experienced a negative income shock due to layoffs, cuts in hours and so on between 2010 and 2016. Among white families, this share was 20.3% during the same time. And, the share of non-white or Latinx families with negative income shocks was also only 20.2% in the years before the Great Recession, from 2001 to 2007.

This is a real problem for Latinx in particular. Latinx work in less stable jobs making them more susceptible to experience unexpected drops in their incomes. People, who frequently have to switch jobs, find it harder to qualify for a retirement plan at work, for example. Only 20.0% of non-white or Latinx families with negative income shocks had a 401(k) plan from 2010 to 2016, while 33.8% of non-white or Latinx families without a negative income shock did. The respective shares of whites were higher with 52.3% of those without negative incomes with a 401(k) plan and 28.8% of those with negative income shocks during that same time. The gap in 401(k) plans by race between those without negative income shocks is already stunningly large. Income volatility exacerbates this key wealth building difference.

Income Volatility Worsens 401(k) Participation By Race.Calculations Based on Federal Reserve's Survey of Consumer Finances.

Income volatility also makes it harder for families to save for their future in general. They will have to dip into their limited savings or borrow money to help them pay their bills, making it harder to save. There is already a substantial difference in saving between non-whites or Latinx and whites, as a result of lower incomes. Greater income volatility is another barrier to saving for people of color.

When a family experiences a drop in income there are a few options available to respond to the emergency. They look to cut back on spending or use their savings. Families of color have less room to cut spending. They then dip more often and deeper into their savings to pay their bills. Families, who experience negative income shocks, often rely on their retirement savings to respond to the emergency, for example. Borrowing from a 401(k) is the most common way for people to access their retirement savings in a pinch. Between 2010 and 2016, 17.6% of non-white or Latinx families with a negative income shock also had an outstanding loan on their 401(k) accounts. In comparison, 16.1% of families of color without a negative income shock had a 401(k) loan. But only 10.2% of whites without a negative income shock did. The racial gap in retirement loans is already pretty large. Income volatility worsens that difference, making it even harder for non-whites or Latinx to build up wealth in their 401(k)s.

Income Volatility Exacerbates 401(k) Loan Differences By Race.Calculations Based on Federal Reserve's Survey of Consumer Finances

Families that are likely to face income shocks also need to have money readily available. This need for more liquidity makes it hard to invest for the long term. Holding cash, though, means that people forego higher returns and end up with less wealth over time. Only 26.3% of non-white or Latinx families who had negative income shocks had any stocks between 2010 and 2016, compared to 39.0% of families of color without any negative income shocks. Again, whites held more stocks, regardless of their likelihood of seeing a drop in income. Almost two-thirds, 65.8% of whites without negative income shocks held stocks and still 47.3% with a negative income shock did.

Whites aren’t necessarily greater risk takers than non-whites or Latinx – they just have more options to build wealth in all forms. They then have a larger cushion against potential losses from risky investments. Whites can seek higher returns in the stock market by taking risks, which poses more of a challenge for non-whites or Latinx. In the end, the racial gaps in income insecurity and wealth are linked.

I am a professor of public policy at the University of Massachusetts Boston and a senior fellow at the Center for American Progress. I joined academia in 2007 after working full time in Washington, DC, think tanks for almost a decade. My research has focused on retirement i...